Everyone latches on to the ADP forecast of the private sector jobs market as though it has meaning. It doesn’t, except as a finger in the wind and entertainment. This time ADP says payrolls will be a measly 128,000, the least since 2020 and contrary to most forecasts of about 300,000.
If ADP is right, here’s how it plays out–traders accept it and lower their payrolls forecasts. They then expect the Fed to see that hikes are working to suppress jobs which means suppressed consumer demand and less wage pressure which together mean the Fed doesn’t have to hike as much as now expected–another two or three hikes of 50 bp each.
The new expectation will become the Fed pulling it its horns, and never mind that monetary policy operates with a lag of 3-9 months. Traders prefer to jump to conclusions. This would be dollar-negative if it’s what develops.
More realistically, acceptance that the Fed will stay the course and also implement QT is going to upset markets. As JPMorgan’s Dimon says, we are absolutely not ready for it. The FT Reports [Dimon] warned of the risk of market volatility as the Fed implements its policy of “quantitative tightening”, under which it will begin shrinking its roughly $9tn balance sheet in an effort to combat high inflation.
So, we have the US economy still doing better than expected but sentiment nearing the cliff-edge. We have the partial end of Chinese lockdowns but a resumption always possible, implying manipulation by the government not only of public health issues but the economy. It is a command economy, after all. We see capitalism and tend to forget that.
And not on the fringe is Russia, now facing fancy missiles from the US, Germany and elsewhere, and the oil market, which can easily go against the grain and explode to $150-175. In other words, current optimism and the “we’re all right, Jack” attitude are misplaced. If things get dire, the dollar can gain on safe-haven thinking. But before then, the market is mis-pricing the Fed and QT. We say run for the hills.